By now, nearly everyone has been exposed to the Internet of Things (IoT) in one way or another, whether through a Fitbit bracelet, a Nest smart thermostat, or now even the Apple watch. But despite all of the hype, IoT is still something of an enigma, both to laymen and investors alike, and from Silicon Valley all the way to Tel Aviv. Moreover, for a number of reasons including a history of Israeli failures in the consumer and hardware spaces, there is a general lack of belief that Israel can be a leader in IoT.

However, at Innovation Endeavors in recent months, we have seen a growing amount of impressive IoT activity coming out of Israel. This intrigued us and led us to do a three-month deep dive into the space. The goal was to both demystify the existing understanding of IoT and identify the trends, sectors, and technologies that can serve as significant opportunities for Israeli entrepreneurs in this space.

But first, what is IoT?

The common definition of IoT is essentially the concept of taking an object, adding sensing and processing capabilities, and connecting it to the Internet, allowing you to remotely collect information, automate and control processes, and more, ubiquitously. While widely accepted, this definition is too broad and one-dimensional, as it lacks a clear application and purpose – or what the investment world would typically describe as a “set of technologies looking for a market”.

Furthermore, because IoT will be almost entirely service-driven according to Gartner, it really only begins to take on meaning when actually applied to specific market verticals. Therefore, a new definition and set of classifications for IoT must (and will) emerge in order for it to become relevant to today’s world and context (more on this below).

Mapping the industry

Our deep dive involved poring over more than fifty market research and analyst reports, and meeting with top Israeli IoT companies and leading experts from around the world. This iterative process yielded enough raw data to create the final 2015 Israeli Internet of Things Landscape, comprising around 330 Israeli IoT companies across 5 verticals and 23 sub-verticals, from the seed stages all the way to revenue growth. Building upon the taxonomies that already exist for IoT, we organized the companies on a one-page landscape according to four parameters: position in the IoT value chain, vertical, sub-vertical, and stage.

Due to issues regarding how IoT is currently defined, we improved upon the accepted methodology in various ways. For example, we introduced new verticals to the landscape to address emerging categories like “Resources”, which describes companies that address the natural environment, such as energy, ag-tech, and water companies. We redefined existing verticals such as by combining “Enterprise” with Industrial IoT. We also renamed others like “Connected Home” to “Connected Building” due to major overlaps between IoT for the home and for commercial buildings. Drilling deeper, we identified certain sub-verticals that stretched across multiple verticals but were not yet mature enough to become platforms themselves (e.g. “Security” which intersects with Consumer, Enterprise/Industrial, and Connected Building). Finally, we topped off the landscape by adding IoT-enabling technologies (like Wi-Charge’s wireless charging or new smart 3D interfaces like MUV Interactive), which we believe peripherally facilitate industry growth in specific contexts, and will ultimately help to redefine IoT as they continue to support the greater IoT ecosystem going forward.

Before publicly releasing the landscape, we “crowd-shared” it with the local IoT community, including investors, the companies themselves, and the greater IoT ecosystem, soliciting their help to correct and improve the landscape before finalizing it.

1) IoT is booming with activity in Israel. According to the landscape research, there are around 330 Israeli IoT companies. As Israel is home to approximately 6,100 active startups in total, IoT represents a surprisingly whopping 5% of the Israeli startup ecosystem! These companies pertain to all verticals, stages, and levels of the stack, and address unique problems across many major markets.

2) Israeli IoT leverages Israel’s strengths in sectors like healthcare, life science, and cyber security. Given Israel’s historical proficiencies, it is not surprising that most of the IoT activity in Israel plays to the country’s unique strengths in areas such as healthcare, science, and cyber security, in new and interesting ways. For example, one Israeli company in the cyber security vertical is Argus Security, which is building a “firewall” for the connected car, defending your vehicle from being compromised by outside attackers, especially hackers that can take control of your car remotely! If, on the other hand, you’re less worried about hackers and more worried about calories, Consumer Physics’ molecular pocket sensor allows you to measure the physical world around you, including food, medicine, plants, and more. For instance, you can scan a piece of cheese and find out complete nutritional information like calories, protein, fat, etc.

3) The Israeli IoT industry is still far from mature. Regardless of sector, most companies on the landscape are stuck in the middle stages of their lifecycle, i.e. the R&D or initial revenues stages. Moreover, nearly 80% of companies are focused around the applications category rather than other levels of the stack (such as IoT platforms or components). This unbalanced distribution in terms of stage and level suggests a severe lack of infrastructure and maturity in this market wherein startups have not yet found their long-term product-market fit or verticalized their supply. However, this also represents an opportunity for companies to capitalize on such “whitespaces” in the landscape, particularly around the platform level where the numbers indicate that it is still early in the lifecycle curve.

What IoT means for Israel

As opposed to the belief that Israel will never be a leader in IoT, we found that if Israeli entrepreneurs can capitalize on their existing IoT-related proficiencies, they can dominate in this space. This is mainly because in Israel IoT already actually has strong, real context. In other words, the sectors that are currently most relevant to IoT – like cyber security, ag-tech, and healthcare – also happen to be the ones in which Israel is already the most advanced around the globe. For example, Israel has some of the most cutting-edge cyber security and defense expertise in the world thanks to elite Israeli military technology units. Team8, one of our most recent cyber security investments, brings together top Israeli cyber talent and ideas to build new technology companies that challenge the current cyber security paradigm. Furthermore, Israel’s rich agricultural “pioneer” history – when early settlers turned to innovation in order to transform what was then an arid desert into fertile land – has enabled Israel to establish itself as a world leader in ag-sciences and ag-tech like Netafim, the world’s first surface drip irrigation technology. This is why we developed our Farm2050 initiative to support such innovation. Not to mention that Israel is only the size of New Jersey, yet holds the most medical device patents per capita in the world. These existing proficiencies have positioned Israel to become a mighty force in IoT going forward.

Not only can Israel benefit from its existing strengths, but also IoT has come along at just the right time for Israel, and is thus enabling it to penetrate new markets that were historically impenetrable. Specifically, Israel has never been very successful at building consumer-facing startups, especially consumer hardware, but today this is changing. As Israeli companies transform their approach in dealing with global markets and have new distribution channels like Kickstarter, at the same time IoT has reinvigorated the consumer devices market. This convergence of factors has created a meaningful window of opportunity for Israeli entrepreneurs to get back into the consumer and hardware spaces.

Final thoughts

This research has revealed that at the end of the day, IoT is not just another marketing term; instead, when applied to solving real, long-term needs, its promise is truly profound. By connecting us to the entire physical world around us, IoT represents the ultimate bridge between the digital and physical worlds that will undoubtedly transform lives and markets as we know them. If the Industrial Revolution was all about hardware, and the Internet Revolution was all about software, the next revolution will be the IoT revolution, which will be all about hardware and software coming together for the first time in a truly meaningful way. It is important that we prepare for the consequences because as much as IoT will come to address our existing needs and desires, it will also create entirely new ones beyond imagination.

At Innovation Endeavors, we are always excited to see strong entrepreneurs leveraging new technologies in emerging markets, and in Israel, IoT represents just that. Due to leading tech, good timing, and a number of other enabling factors, Israel finally has the ways and means to make a lot of noise in IoT on the world stage, and each of the specific tech advantages Israel holds will play a strategic role in IoT going forward. This makes Israel of critical importance to the global evolution of IoT, and very uniquely positioned to become a future leader in the field.

Innovation Endeavors is an early-stage venture capital firm partnering with startups that apply cutting edge technology to transform large industries. The firm runs a dedicated global team that builds industry networks to create value for its portfolio companies. Innovation Endeavors has offices in Silicon Valley and Tel-Aviv, and is solely backed by Eric Schmidt, the Executive Chairman of Alphabet.